FA 3 - Financial Statements

Question 1

Real accounts

Answer 1

i. Asset, liability and equity accounts;
ii. Cumulative balance over time;
iii. Reflected on the Balance Sheet; and
iv. Also called Permanent Accounts.

Question 2

Nominal accounts

Answer 2

i. Revenue and expense accounts;
ii. Reflect activity over a certain period of time;
iii. Reflected on Income Statement; and
iv. Also called Temporary Accounts.

Question 3

Balance Sheet definition

Answer 3

Shows a company’s financial position as of a specific date.

Question 4

Income Statement definition

Answer 4

Shows a company’s financial performance over time

i.e. - shows all revenue and expense accounts for, say, a given accounting period (usually a year)

Question 5

Balance Sheet contents

Answer 5

GAAP: current assets, non-current assets, current liabilities, non-current liabilities, owners’ equity.
Most liquid first.

IFRS: non-current assets, current assets, owners’ equity, non-current liabilities, current liabilities.
Least liquid first.

Question 6

Income Statement contents

Answer 6

Gross Profit =
Sales - Cost of Goods Sold.

Operating Income =
Gross Profit - Operating Expenses.

Income before taxes =
Operating Income - Non-Operating Expenses + Net of Interest Received and Interest Paid.

Net Income =
Income before taxes - Taxes.

Question 7

Liquidity

Answer 7

How quickly and easily an item can be converted to cash.

Question 8

Notes payable, goodwill, common stock

Answer 8

Notes payable = Non-current liability;
Goodwill = Non-current asset; and
Common stock = Equity.